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Gavekal Dragonomics
Chen Long
Jul 01st 2019
Macro Update: Trade Truce, Growth Tremors
It was a rocky second quarter for China, with trade tensions escalating and then easing, and domestic growth disappointing. In his latest chartbook, Chen Long assesses the current lay of the land. The growth slowdown is not over yet as macro policy has stayed relatively cautious, but easing trade tensions should boost equities and the currency.
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Gavekal Dragonomics
Thomas Gatley
Jun 28th 2019
Video: What Drives Chinese Equities
Chinese equity markets are up around 26% for the year. Yet there has been no recovery in earnings growth, and the trade war and shaky domestic economic momentum continue to loom. The reason for the market optimism is expectations of supportive government policies, whether or not those expectations are valid.
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Gavekal Research
Tan Kai Xian
Jun 28th 2019
The Story Behind Low US Volatility
When Donald Trump declared his trade war against China in the spring of 2018, investors could have been forgiven for expecting the resulting uncertainty and additional economic friction to add both to US equity market and GDP growth volatility. In fact, equity market volatility has generally been low, and US economic growth has remained stable.
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Gavekal Research
Arthur Kroeber, Dan Wang
Jun 27th 2019
A Cold War Interglacial
It is now almost certain that presidents Donald Trump and Xi Jinping will restart trade talks at the G20 summit in Osaka this weekend. Moreover, discussions in Washington suggest that there is a good chance these talks will result in a deal in the next few months. Our core scenario now is that macro risk from an escalating trade war is receding. There are also signs that the US and China could negotiate a truce on Huawei, lifting the apparent...
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Gavekal Research
Louis Gave
Jun 26th 2019
Trade War II, The Dollar And Gold
After the opening Twitter salvo in "Trade War II" by Donald Trump in May, markets have reacted quite differently from "Trade War I" in the spring of 2018. This time, the Federal Reserve is sounding more dovish, US bond yields have fallen back to 2%, the dollar seems to be rolling over, and gold and EMs are doing well. This raises the question whether the investment environment is changing before our eyes.
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Gavekal Research
Tom Miller, Chen Long
Jun 26th 2019
Can Vietnam Win The Trade War?
Vietnam is being touted as the big winner of the US-China trade war as companies shift their supply chains toward the low-cost export powerhouse. In the long term that is likely. In the short term, however, an improved export performance may be partly down to Chinese exports being routed through Vietnam to escape US detection.
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Gavekal Research
Tom Holland
Jun 25th 2019
The Iran Wildcard
Of the many risks besetting investors right now, the hardest to assess is the confrontation between the US and Iran. Should tensions escalate into a shooting war, the consequences would be far-reaching and severe. However, looking beyond the bellicose rhetoric there are reasons to believe that the balance of probability still weighs against a marked escalation.
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Gavekal Research
Will Denyer
Jun 25th 2019
Libra's Monetary Challenge
Facebook has 2.7bn users and 90mn companies operating on its various platforms. Perhaps more than any other non-state player, it has the resources, reach and data trove to launch a global currency. Will is not convinced and tackles the issue by asking what benchmarks the new Libra currency will need to hit if it is to become a widely-used medium of exchange.
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Gavekal Dragonomics
Thomas Gatley
Jun 24th 2019
Liquidity Improves, But Not For All
China’s policymakers are pushing banks to offer more financing to private-sector firms, trying to solve their liquidity squeeze. In this piece, Thomas inspects the data for the effects of that push, and finds that new credit is flowing mainly to the largest and smallest firms. The mass of medium-sized private firms are still in a tough spot.
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Gavekal Research
Charles Gave
Jun 24th 2019
What Gold Is Telling Us
Over the last few weeks long bond yields collapsed, which in turn led to a collapse in something called “inflation expectations”. Now, inflation expectations are a very useful indicator built by very clever PhDs. The main purpose of this indicator appears to be to persuade investors that they should buy bonds just when they really should be selling them.
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Gavekal Research
Louis Gave
Jun 21st 2019
Video: China's Three Vulnerabilities
Even if Presidents Donald Trump and Xi Jinping leave the G-20 meeting in Osaka next week with a trade deal in hand, the broader rivalry will continue. In this extensive video interview Louis identifies three ways in which China is vulnerable to US pressure and explains how this may impact investors.
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Gavekal Research
Arthur Kroeber
Jun 21st 2019
Keeping China In Play
Next week’s big event will be the G-20 leaders’ meeting in Osaka, where presidents Donald Trump and Xi Jinping will sit down to figure out whether their stalled trade negotiations can be re-started. It is quite likely that trade talks will get back on track, but quite unlikely that a deal can actually be struck before the end of the year.
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Gavekal Research
Will Denyer
Jun 20th 2019
How To Play The Fed Tease
After the Federal Reserve’s two-day policy meeting, chairman Jay Powell told the market what it wanted to hear. Policymakers see rising risks and stand ready to cut interest rates, but there is no reason to panic—just yet. Real growth is solid, which is good for earnings, but inflation pressures are muted, allowing the Fed to be more accommodative.
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Gavekal Research
Louis Gave
Jun 19th 2019
Investing For A New Cold War
Earlier this year, Louis and Charles published a book whose main thesis was that an era of globalization is ending and the world is breaking into three separate economic zones.The question Louis addresses in this piece is how investors should play this macro shift. Those strategies that did best over the last decade are unlikely to outperform in the next period.
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Gavekal Research
Andrew Batson
Jun 19th 2019
Rebalancing Won't Rescue China
As China hunkers down for an extended trade conflict with the US, it is sending reassuring signals about its ability to withstand the pressure. Officials argue the economy has “rebalanced” away from external to domestic demand, so it is less vulnerable. In this piece, Andrew explains how this misreads the role of exports in longer-term growth.
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Gavekal Research
Cedric Gemehl, Nick Andrews
Jun 18th 2019
The ECB After Draghi
At the ECB's annual shindig in Portugal this week, two questions matter. Given negative interest rates and capital key constraints over asset purchases, how does the ECB fight the next downturn? And who will replace Mario Draghi? His successor must be politically cunning if they are to persuade Europe’s leaders that monetary policy is reaching its limits, and fiscal policy must take the strain.
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Gavekal Dragonomics
Dan Wang
Jun 17th 2019
Taking Intellectual Property Seriously
It is easy to forget that the US trade war with China is founded on the issue of intellectual property—and to miss the fact that, despite the breakdown in trade talks, China is pushing through many legal changes to improve IP protection. But as Dan explains, while the technical improvements are real, so is political pressure on the legal system.
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Gavekal Research
Udith Sikand
Jun 17th 2019
Japan's Fiscal Dilemmas
As investors worry about global economic weakening, attention is turning to the cavalry, which in recent years has been central banks. In Japan poor survey and sentiment readings have sparked surprisingly dovish public comments by the BoJ governor. In fact, investors may be better off listening to the prime minister, as the real game may now be fiscal.
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Gavekal Dragonomics
Chen Long
Jun 14th 2019
Enduring The Slowdown
China’s growth momentum faded noticeably in May, and while the government rolled out new supportive measures, they are fairly modest. The data over the next couple of months could be pretty uninspiring. But as Chen Long argues in this report, policymakers still prefer to soften the slowdown rather than try to generate a big cyclical upswing.
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Gavekal Research
Udith Sikand, Tom Miller
Jun 14th 2019
India Macro Update: Post-Landslide Lethargy
After the victory party, Narendra Modi’s reelected government's focus is shifting to structural reform, but Udith and Tom have fairly low expectations that this will materialize anytime soon and hold a cautious view on Indian risk assets. Such an environment should offer a reasonable outlook for government bonds.
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Gavekal Research
Tan Kai Xian
Jun 14th 2019
Don't Worry About The US Consumer
There is a schizophrenic quality to commentary on the health of the US consumer. On the bright side, sentiment readings are cheery and the labor market is generally solid. Yet on the other hand, Cassandras point to rising credit card delinquency rates, and weakness in sales of autos and homes as early signals of a recession. So what gives?
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Gavekal Research
Charles Gave
Jun 13th 2019
Worrying About Bond Yields
Germany yesterday sold medium-dated bunds at a record -24bp, while treasury yields are back near three year lows. In yesterday’s Daily, Louis outlined reasons for the surge in US bond prices, and argued that a reversal could occur if the US dollar weakens more. Today want to ask how such a shift in the rates environment will impact economic growth and equities.
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Gavekal Research
Anatole Kaletsky
Jun 13th 2019
Video: Bull Markets Don't Die Of Old Age
The US economic expansion is entering its 11th year, which makes some wonder whether the end of the business cycle is nigh. Anatole thinks that’s asking the wrong question, because bull markets don’t die of old age. They are, however, more susceptible to diseases of old age. He identifies three events that would cause an economy to keel over. Also on the docket is the seemingly contradictory signals sent by bullish US equity markets and bearish...
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Gavekal Research
Louis Gave
Jun 12th 2019
Driving The Bond Bubble—The Sum Of All Fears
For the past 30 odd years, President Donald Trump has opposed free trade and argued that foreign producers should face tariffs. Yet the market responds with shock each time the US threatens new tariffs. By the same token, almost every central banker today is saying they (i) want to see higher inflation, (ii) will stop at nothing until inflation picks up, and (iii) once inflation duly appears, they will likely let it ramp up. So how does the...
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Gavekal Research
Simon Pritchard
Jun 11th 2019
The Threat To Hong Kong
On Sunday, a million Hong Kongers protested a planned law change that will let individuals be extradited to face trial in China, the city’s biggest political protest in more than 15 years. On Monday, the city’s equity benchmark rose 2%. The betting is that this political furor will pass. But the broader context puts the city at risk of becoming collateral damage in the US-China confrontation.
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Gavekal Dragonomics
Ernan Cui
Jun 11th 2019
Tourism Falls Victim To The Trade War
The boom in China’s outbound tourism could go down as another casualty of the trade war. As Ernan explains in this piece, the combination of a weakening currency and rising political tensions is becoming a major drag on international travel by Chinese—just as the structural factors driving outbound tourism growth are shifting into a lower gear.
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Gavekal Research
Anatole Kaletsky
Jun 10th 2019
Not Such A Dystopian Market
Although Donald Trump's lifting his threat to impose new tariffs on Mexico was good news, raising the chance of a US-China trade climbdown, betting good money on the US president getting up on the right side of the bed is ill advised. So, to maintain our sanity we should focus on US economic data and monetary policy, which turned positive last week.
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Gavekal Research
Nick Andrews
Jun 07th 2019
The ECB Reloads
The ECB may hope for the best, but it is preparing for the worst. As Mario Draghi prepares to hand over the ECB’s reins to an undecided successor, he seems to be restocking its armory.
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Gavekal Research
Tan Kai Xian
Jun 06th 2019
Recession Risk Mispriced
US treasury yields are up from their 21-month low touched earlier this week, but the market is still priced for recession. Sure, the trade war uncertainty is negative for risk assets. But there are good reasons to believe that the US economy will continue to grow, albeit at a modest rate. As a result, piling into treasuries at current yields is a dangerous move.
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Gavekal Research
Charles Gave
Jun 05th 2019
Video: Italy And Europe's Banking Problem
The eurozone's main banking index is back at a key threshold that over recent decades has seen large-scale intervention by global central banks. For Charles, the root of the problem lies in the deteriorating Italian economy. In this video interview, he explains this dependence and argues that this time there may be no explicit support coming for the banking sector.
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Gavekal Research
Charles Gave
Jun 05th 2019
The Malthusian Constraint
Over the last few years, Gavekal has put considerable time and effort into researching portfolio construction in the hope of making the process a little more scientific. This research has led to some interesting results, and suggests some powerful investment themes for the future.
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Gavekal Dragonomics
Thomas Gatley
Jun 05th 2019
Navigating The Shocks To Earnings
Chinese listed companies have lately suffered more than their fair share of shocks to earnings. In this piece, Thomas explains the financial and accounting problems that have squeezed profits in recent quarters. But he argues that, even with the trade war, 2019 is likely to be a normal profits downcycle rather than a disastrous one.
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Gavekal Dragonomics
Lance Noble
Jun 04th 2019
How Multinationals Are Managing The Trade War
The collapse of US-China trade talks and the ratcheting up of tariffs has intensified the challenges faced by global companies with operations that span both countries. In this piece, Lance reports on their range of responses to the trade war: some are shifting out of China, some are investing more in China, and some are not doing anything yet.
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Gavekal Research
Will Denyer
Jun 04th 2019
Trump's War And Our Problem
In the seven decades after World War II, the most powerful nation in the world could be relied on to defend and promote free trade among nations. Then came President Donald. J Trump. Now it’s conceivable that Trump’s goal is to shake up the old rules-based system.
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Gavekal Research
Udith Sikand
Jun 03rd 2019
EMs Hit The Trade Wall
It is not clear if the latest trade actions launched by the US against Mexico and India form part of coherent plan. Such moves do signal that the US-centered multilateral trading system is hanging by a thread. This upending of the post-WWII order is especially bad news for trade-dependent emerging economies.
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Gavekal Research
Research Team, Tom Holland
Jun 03rd 2019
Strategy Monthly: Who Suffers Most In A Long Trade War?
Markets have started to price in a long US-China trade and tech war, and we agree. The odds now favor an indefinite conflict. Damage from the trade war will vary based on a country’s trade-dependency and policy space. Big problems could emerge in Europe and in EMs exposed to China’s supply chain.
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Gavekal Research
Charles Gave
May 31st 2019
Yes, We Are In A Bear Market
In late 2017, Charles argued that global equity markets looked to be topping out, and it was time to adopt a more conservative strategy. As things turned out, the global equity benchmark hit a peak in late January of 2018, and has not retraced that level. He now argues that global equities have likely entered a bear market cycle.
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Gavekal Research
Nick Andrews, Cedric Gemehl
May 31st 2019
A European Vortex
There is a big disconnect between markets and reported data in the eurozone. Bund yields are within a whisker of all time lows, inflation expectations have cratered and the Eurostoxx banks index fell -12.5% in May. Yet at the same, Europe’s macro data, while not great, points to stabilization after a 16-month industrial downturn.
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Gavekal Dragonomics
Chen Long
May 30th 2019
The Central Bank's Reform Agenda
The escalation of the trade war with the US likely means that the People’s Bank of China will keep easing monetary policy. But as Chen Long explains, the PBOC will also be pursuing a structural reform agenda. It wants to boost lending to the private sector and move to market-based interest rates—while still preserving overall financial stability.
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Gavekal Research
Will Denyer
May 30th 2019
An Ugly Trade War And An Inverted Yield Curve
Will a trade war boost US growth and inflation, or instead cause a deflationary recession? The bond market is basically saying that a trade war will dent US growth and force the Federal Reserve into easing. Bear with my two-handed explanation, but there are also good reasons why it could also boost nominal growth.
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Gavekal Research
Nick Andrews
May 29th 2019
Harder Times For European Luxury
It is conceivable that some European industries may benefit from the trans-Pacific economic cold war, picking up business lost to their US and Chinese competitors as a result of the worsening tensions. But one sector that will not benefit is the European equity investor’s favorite: luxury goods. European luxury goods companies now face tougher times ahead.
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Gavekal Research
Louis Gave
May 29th 2019
China's Options In The Unfolding Trade War
China is widely seen as having a pretty miserable hand in its trade stand-off with China. However, Louis is not convinced that China has so few options. Here he considers Beijing’s scope for retaliation, and so leverage, from using its financial clout to spook US capital markets to winding up Kim Jong-un to start causing trouble for the US and its allies.
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Gavekal Research
Arthur Kroeber, Dan Wang, Matthew Forney
May 29th 2019
Audio & Transcript — The US-China Trade And Technology Mess
In yesterday's special Gavekal Research Conference call Gavekal's Arthur Kroeber and Dan Wang, along with Fathom China's Matt Forney, considered what the breakdown of the US-China trade talks means for the trajectory of the trade war, and what the blacklisting of Huawei means for the tech cold war.
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Gavekal Research
Cedric Gemehl
May 28th 2019
Video: European Election Fallout
The European Parliament elections saw established parties pummeled, but the political center broadly hold out against the forces of nationalist-populism. In this video interview, Cedric considers what that means for investors and how systemic European risk should now be understood.
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Gavekal Research
Tan Kai Xian
May 28th 2019
The Message In Market Dispersion
Economic events create winners and losers. It is too early to say with confidence how the current US trade and technology confrontation with China will play out, or whether US tariffs on imported autos and the threatened retaliation will go into force. But it is possible to tell how great investors believe the potential disruption is likely to be.
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Gavekal Dragonomics
Andrew Batson, Chen Long
May 27th 2019
Who Wants A New Long March?
Since the collapse of the US-China trade talks, the public position of both sides has hardened. Top leader Xi Jinping’s call for a “new Long March” was widely taken as a sign he is ready for a protracted standoff with the US. But support for such a stance is not universal, as the surprising public comments of Huawei chairman Ren Zhengfei suggest.
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Gavekal Research
Louis Gave
May 27th 2019
Parliament Of Losers
For anyone who did not grow up in a Commonwealth country, one of the most perplexing things about the game of cricket is that matches can last for as long as five days, and at the end of it all still end up in a draw. Much the same can be said about European parliamentary elections: they take for ever, and it is often hard to identify a clear winner. Identifying losers, however, is simpler. And looking at Sunday night’s results there were both...
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Gavekal Research
Tom Miller
May 24th 2019
India After The Victory Party
After Narendra Modi’s landslide victory in India’s general election, the economic issues that must be tackled quickly are stacking up. Tom runs through the Indian leader’s inbox and concludes that the scale of the short term problems he faces rules out a 2014-style euphoric run-up in Indian equity.
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Gavekal Research
Tom Holland
May 24th 2019
Video: Iran And The Oil Price
Angry rhetoric between the US and Iran reached blood-curdling intensity after the US announced in late April that it wouldn't grant waivers for sanctions on Iran's oil exports. While this caused a short term spike in the oil price, it has since fallen about -8% from its high. Are oil traders too complacent about the risks, or does the market have it right?
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Gavekal Research
Louis Gave
May 24th 2019
A Change In The Market Mood
Thursday was an ugly day for global equity markets, with losses that brought total returns on US equities almost back to their January 2018 level, and non-US equities to the brink of bear market territory. It is hard to shake the feeling that the investment environment has changed. What lessons should we draw from the tumultuous trading session?
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Gavekal Research
Arthur Kroeber
May 24th 2019
Trade War: Back From The Dead
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Gavekal Dragonomics
Ernan Cui
May 23rd 2019
The Household Debt Service Burden
The rapid rise in China’s household debt has become a major concern for markets and policymakers. While most analysis looks at the household debt-to-GDP ratio, in this report Ernan calculates the household debt service ratio for a better angle on the problem. She finds that the debt burden on household budgets will keep increasing in 2019.
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Gavekal Research
Cedric Gemehl
May 23rd 2019
Don't Bet On A German Fiscal Boost
On Wednesday the OECD added its voice to the chorus calling on the German finance ministry to open its fiscal tap and juice up economic growth with additional public spending on investment. Yet although the outlook for external demand is darkening, investors should not hold their breath for a sizable fiscal boost.
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Gavekal Research
Anatole Kaletsky
May 22nd 2019
May's Last Stand
When something unexpected happens and the market moves against you, it is usually best to cut your losses. But sometimes it is worth indulging the contrarian instinct. This month most of the pound's gains in the first quarter have been given up and sterling’s position looks dicey. But sterling bulls should not cut their losses. In fact, they should consider doubling down.
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Gavekal Dragonomics
Dan Wang
May 21st 2019
The Fate Of Huawei
The US government has China’s most prominent technology firm in a stranglehold. The question now is whether the US government continues to strangle Huawei until it goes out of business, or chooses to eventually stop squeezing and allow a weakened Huawei to keep operating under some limitations. In this report, Dan explores the possible scenarios.
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Gavekal Research
Cedric Gemehl
May 21st 2019
Everything You Wanted To Know About EU Politics
This week EU voters will elect representatives to a legislature that has often been dubbed a snooze fest. That has changed as populist-nationalist parties challenge the established organs of government. Cedric gives a detailed explanation of how politics works at a supra-national level in Europe, and how current tensions are changing the key institutions.
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Gavekal Research
Charles Gave
May 21st 2019
The Trouble Unseen
The world and its dog are suddenly worried that the growing US-China trade war may be the event that sparks the next panic. Might I suggest that the looming iceberg that could yet sink the good ship Global Growth may not lie in the obvious spot where spy glasses are focused.The real menace may still lie in the European banking system.
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Gavekal Research
Arthur Kroeber
May 20th 2019
Trump's Trade War Calculus
Keeping track of all the pieces of the US-China confrontation has become a full-time job. But the chaos and uncertainty of the past couple of weeks has begun to resolve itself into fairly clear patterns, even if the outcomes remain in doubt. Three main conclusions emerge from last week’s activity, and none of them are particularly reassuring.
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Gavekal Dragonomics
Chen Long
May 17th 2019
Video: How Much Downside For The Renminbi?
Since the US slapped fresh tariffs on Chinese exports a week ago, the renminbi has fallen, but by less than when the first round of tariffs were imposed last year. In this video interview, Chen Long discusses why that is, and how far China’s currency is likely to fall if things get worse.
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Gavekal Research
Tom Holland
May 17th 2019
Oil Market 1, Commentariat 0
As if the macroeconomic impact of a full-blown US-China trade war weren’t enough to worry about, over the last couple of weeks investors have also had to contemplate the risk of a real shooting war between the US and Iran, the effect it would have on the price of oil and the threat that would pose to a fragile global economy and jittery world markets.
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Gavekal Research
Nick Andrews
May 16th 2019
One Reduction Of Risk At The Margin
By putting off for six months its decision whether or not to impose a 25% tariff on all imports of passenger cars and car parts on national security grounds, the US administration bowed to expedience on Wednesday. In theory, the threat of auto tariffs remains on the table. In practice, the six month delay has robbed the proposal of much of its credibility.
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Gavekal Dragonomics
Andrew Batson
May 16th 2019
Stabilization At Risk
China’s economic data for April came in rather worse than the too-good-to-be-true indicators for March. As Andrew explains in this report, the April figures do not actually show a serious deterioration, and property is still holding up. But the stabilization in growth is now under threat from a more protracted trade conflict with the US.
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Gavekal Research
Udith Sikand, Edward Hookey
May 16th 2019
A Less Than Bonza Outlook
Australian politics has been a psychodrama for more than a decade, but for investors it barely mattered. The country has grown rich on selling ever more rocks to China and following smart, evidenced-based policy at home. That, however, looks to be changing as this weekend voters go to the polls after an election campaign that may come to be seen as a watershed.
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Gavekal Research
Louis Gave
May 15th 2019
The Case Of The Missing Inflation: The Changing Demographic Picture
Demography, it is said, is destiny. If so, then the finger of destiny may be pointing at a more inflationary future for the world economy. Louis reviews the slow shifts in demographic profile which govern trends in consumption and savings, and so propel the forces of inflation and deflation over the very long term.
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Gavekal Research
Charles Gave
May 15th 2019
Monopsonies, Protectionism And ROIC
It is extremely unfashionable to say so, but Donald Trump’s campaign to bring manufacturing industries back to the US by slapping tariffs on goods imports may not be quite the act of economic illiteracy most professional practitioners of the dismal science would have you believe. On the contrary, it could well be positive for US growth, living standards, and market outperformance.
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Gavekal Research
Chen Long
May 14th 2019
Beijing's Most Effective Trade Tool
In response to the escalation of the US-China trade war, Chinese policymakers are likely to step up their easing measures. This should help support domestic demand. But as Chen Long argues in this piece, the effect of policy easing, coupled with the impact of increased tariffs on China’s exports, will add to downward pressure on the renminbi.
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Gavekal Research
Arthur Kroeber
May 13th 2019
The Trade War Story Lines Harden
The US-China trade war has three potential outcomes. First, we could see a step back from brinksmanship and a deal in the next few weeks. Second, the two sides could dig in for more protracted negotiations. Third, the talks could break down and the trade war become permanent. With the probability of each outcome less than 50%, the only certainty is continued uncertainty.
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Gavekal Research
Anatole Kaletsky
May 13th 2019
Goldilocks And The Ten Bears (2019)
Anatole returns to the framework he set out in November 2017, examining the 10 key risks that could threaten global markets over the next 18 months and which investors should monitor closely—and he comes to some surprising conclusions about the central locus of global dangers.
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Gavekal Research
Nick Andrews
May 10th 2019
Video: Is The Worst Over For The Eurozone?
Eurozone economic growth was modest in the first quarter of 2019, but it was still stronger than most economists had expected, with Germany avoiding a recession and Italy returning to growth. Meanwhile eurozone equity markets are up a respectable 13% over the year to date. Does this mean Europe is emerging from its economic soft patch?
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Gavekal Research
Louis Gave
May 10th 2019
The Motivation Behind Trump's Tweets
Since becoming president, Donald Trump has made it clear that he sees the S&P 500 as the real-time judge of his White House performance. Why, then, did Trump on Sunday send a tweet alleging that China had backed off from agreed positions in the US-China trade talks, and in so doing rattle a market priced for Goldilocks?
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Gavekal Research
Charles Gave, Louis Gave
May 09th 2019
Audio & Transcript — Gavekal Research Call May 2019
Investor concern this week is centered on the US-China trade negotiations, but Charles Gave and Louis Gave wonder if investors aren’t missing another risk, namely, that the world might be shifting from a deflationary to an inflationary environment. In our monthly Conference Call yesterday, they outlined arguments for why this may be the case, and what it would mean for portfolio construction.
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Gavekal Dragonomics
Lance Noble
May 09th 2019
Where Can Industrial Policy Work?
The Trump administration’s trade war has targeted China’s ambitious industrial policy, which China clearly has no intention to abandon. But will that industrial policy work? In this report, Lance explains his eight-point system for evaluating industrial policy’s odds of success, and tests it on electric vehicles, airplanes and pharmaceuticals.
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Gavekal Research
Tan Kai Xian
May 09th 2019
A Better Time For A Trade War
For equity investors, there is a never a good time to have a trade war. Nevertheless, if there must be one, the US stock market is now better placed to ride out a US-China tariff conflict than it was a year ago. That’s just as well. Chinese negotiator Liu He is set to arrive in Washington on Thursday for the latest round of trade talks which are going down to the wire.
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Gavekal Research
Udith Sikand
May 08th 2019
Gauging The EM Collateral Damage
After Donald Trump’s weekend tweets, trade war is once again the center of attention for investors. The perceived probability of an escalation has risen sharply, and risk assets have sold off. Asian emerging markets have not escaped the rout, but it would be a mistake for investors to treat all Asian emerging markets equally.
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Gavekal Research
Louis Gave
May 08th 2019
The Case Of The Missing Inflation: Chinese Foreign Exchange Policy
As the US-China trade talks enter a critical phase, all eyes are on a new meeting of officials and whether it can can break the log jam. Louis, however, wonders if investors may be missing a trick by purely focusing on issues of market access, enforcement and tariffs. Adjustments in the value of the renminbi may yet be the real story of any deal.
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Gavekal Research
Louis Gave
May 08th 2019
Series: The Case Of The Missing Inflation
As the Federal Reserve launched the second round of its quantitative easing, the fear was that the Fed’s unorthodox monetary policy would ignite a new round of inflation throughout the world, with dramatic effects on asset prices. After all, most asset prices are driven by the interaction of inflation and economic activity. But inflation failed to materialize, and even fell from more than 3% globally in 2010 to negative territory in 2015. These...
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Gavekal Research
Charles Gave
May 07th 2019
A Reverse-Engineered US Inflation Indicator
In the Strategy Monthly I presented a fairly simple rule to show whether an economy is in the top, or the bottom half of the Four Quadrants framework. To show that the rule worked, I laid out relationships between the "rule" and a range of other useful indications of a price environment shift. Here, I capture all of these relationships in a simple, revised decision rule.
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Gavekal Dragonomics
Andrew Batson
May 07th 2019
Xi's Pivot To The Private Sector
The improved economic outlook for China in 2019 owes a lot to an effective stimulus and progress toward a trade deal. But it has also been driven by top leader Xi Jinping’s surprising political pivot from champion of state enterprises to patron of the private sector. In this piece, Andrew examines how sincere Xi’s new stance will prove to be.
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Gavekal Research
Tan Kai Xian, Will Denyer
May 06th 2019
How Long Can Productivity Contain US Inflation Pressure?
April’s US payrolls report showed job creation was stronger than expected and unemployment lower, yet wage pressures were softer. This suggests weaker unit labor costs will allow the Fed to remain dovish, at least for now. All else being equal this is positive for equity investors. The question is: How long can this benign combination persist?
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Gavekal Research
Arthur Kroeber
May 06th 2019
Trade Deal Delayed, Not Yet Denied
Any trade negotiator will tell you that the last yard is always the hardest. That is obvious now in the US-China trade talks, which were thrown into doubt by Donald Trump’s weekend tweets threatening to hike tariffs on US$200bn of imports from China from 10% to 25% this Friday if a deal is not done.
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Gavekal Research
Udith Sikand
May 03rd 2019
Video: India’s Acceleration Phenomenon Explained
Multinationals and investors are looking to India to deliver the next great surge in sales of consumer goods and services. But demand will not expand in a linear fashion as GDP increases. The acceleration phenomenon dictates that sales of different products and services will grow in leaps and bounds as cohorts of new consumers surpass key income thresholds.
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Gavekal Research
Louis Gave
May 03rd 2019
Q&A On The Hong Kong Dollar Peg
The recent publication of a letter on the future of the Hong Kong dollar peg by Gavekal’s good friend Kyle Bass has triggered a flood of questions on the topic from clients. Now, Louis admits that there may be some home bias to this conviction that the Hong Kong dollar peg is not under threat. But in this paper, he sets out his answers.
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Gavekal Research
Charles Gave
May 03rd 2019
Inflation And The Gold Fix
When the market rate of interest for a long period has been held abnormally low relative to returns on invested capital, financial engineering takes off with huge debt issuance, making a chaotic denouement of the credit cycle unavoidable. To prepare for such an event, an equity portfolio hedged with gold can reduce volatility and raise returns.
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Gavekal Research
Nick Andrews
May 02nd 2019
The Message In Eurozone Money
The advanced estimate of first quarter eurozone GDP released on Tuesday came as a pleasant surprise. Growth came in stronger than generally expected, while Italy emerged from recession. With the MSCI EMU equity index up almost 17% YTD in local currency terms, the question is whether growth can be sustained over the coming quarters.
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Gavekal Research
Charles Gave
May 02nd 2019
Strategy Monthly: The Inflation Shift And Portfolio Construction
Despite inflation remaining muted, Wednesday saw the Federal Reserve stand pat on interest rates. Having switched to an overly dovish stance early this year, Fed Chairman Jay Powell remains wary of changing tack and easing policy as he worries about inflationary pressure bubbling up from an economy that looks to be fully occupied. For his part, Charles is less nuanced and believes the US will shortly flip over into an environment where inflation...
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Gavekal Research
Udith Sikand
May 01st 2019
Look Through The Trade Data
After rallying 10% in 1Q19, emerging market equities have hit an air pocket as investors worry about global growth. Given the link between EM profitability and global trade, data showing that activity shrank in both volume and value terms in the three months to February has raised concerns. It hasn’t helped that the Washington side of the US-China trade talks has amped up “no deal” rhetoric in what is slated to be the final run-in of the...
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Gavekal Dragonomics
Tom Miller
May 01st 2019
Struggling To Reform The Belt And Road
China’s much-criticized Belt and Road Initiative will become “open, green and clean,” Xi Jinping pledged last week. Do these new promises mean an end to the debt traps, kickbacks and white elephants that the infrastructure spree has been accused of fostering? In this piece, Tom argues Beijing will struggle to fundamentally reform the initiative.
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Gavekal Research
Thomas Gatley
Apr 30th 2019
The World's Biggest Bull Loses Steam
China’s equity bull market has lost steam in the last 10 days after the Politburo adopted a less supportive tone following stronger than expected economic data in March. Even before the announcement, market ebullience had moderated. This is positive for China's stock market development, since it reduces the risk of an over-muscular regulatory reaction.
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Gavekal Research
Will Denyer, Tan Kai Xian
Apr 29th 2019
Managing Today’s Biggest Risk
The US first quarter GDP data released on Friday proved consistent with the picture of slower—but still positive—growth through 2019, and a continuation of the Goldilocks tailwind for asset markets. But after a strong run-up in equities this year, it might be time to ask what the greatest risk is to the current environment, and how to position for it.
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Gavekal Research
Louis Gave
Apr 29th 2019
The Case Of The Missing Inflation: US Fiscal Policy
The US seems set to run huge fiscal deficits for as far as the eye can see, and it is not clear who is going to fund this indulgence. In the fourth instalment of his “missing inflation” investigation Louis considers the options available to the US Treasury and concludes that hard funding choices will likely be ducked by whoever wins the 2020 election.
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Gavekal Research
Chen Long
Apr 26th 2019
The Least Ugly Duckling
In a year marked by unexpected US dollar strength, the renminbi is one of the few major currencies to be up against the dollar. The reason is simple enough: the resumption of trade talks between the US and China. Yet although a trade pact is now substantially priced in, there are reasons to believe the renminbi has further upside potential.
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Gavekal Dragonomics
Chen Long
Apr 26th 2019
Video: Is The Worst Behind Us?
At our seminar in Shanghai, Chen Long presented the outlook for China’s economy and markets. Crucially, the credit cycle appears to have bottomed out, and credit growth should accelerate towards the end of the year. He expects the overall economy to follow suit. He also covered the outlook for capital markets, equities and the renminbi.
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Gavekal Research
Louis Gave
Apr 26th 2019
The Case Of The Missing Inflation: Chinese Monetary Policy
China’s response to the Fed’s QEII program in 2010 was to tighten monetary policy, as it feared a spill-over effect into inflation. Since that point China has seen credit growth progressively slow, making it an inhibitor to any global rebound in inflation. This orientation by China is changing as the focus of policy shifts away from crimping the shadow finance sector.
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Gavekal Research
Anatole Kaletsky
Apr 25th 2019
Why The Bulls Are Back In Charge
Now that the S&P 500 has hit a new all-time high and other stock markets have recovered most of the steep losses they suffered last summer, it seems a lifetime since the financial panics of 2018. Investors who bought the dip have enjoyed Wall Street’s strongest quarterly performance in this bull market. After being so well rewarded, how should bullish investors who kept the faith now respond?
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Gavekal Dragonomics
Rosealea Yao
Apr 25th 2019
The Property Cycle Perks Up
China’s property market data has been surprising on the upside. Thanks to easier credit and looser administrative restrictions, sales volumes picked up in March and prices rose. In this paper, Rosealea examines whether the upturn can last, and assesses what it means for land sales, construction activity, materials prices and the broader economy.
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Gavekal Research
Cedric Gemehl
Apr 24th 2019
A Fire-Tested Macron
Tomorrow will see Emmanuel Macron deliver the big national address that got upended by the Notre Dame inferno on April 15. His speech will outline a mix of tax breaks, constitutional modernizations and symbolic grand gestures. The broad story, however, is that the effort to reform France remains broadly on track.
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Gavekal Research
Louis Gave
Apr 24th 2019
How Contagious Is The Health Care Downturn?
On paper, this should have been a good year for health care stocks: global growth has disappointed, long term interest rates have fallen, the US yield curve for a brief while was inverted and a looming US-China trade deal should see China buy lots of health care gear and drugs from the US. Yet, even though the stars aligned, health care has been the worst performing major US equity sector this year. Notwithstanding a bounce yesterday, the sector...
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Gavekal Research
Tom Holland
Apr 23rd 2019
Iran Waivers And The Oil Price Spike
US Secretary of State Mike Pompeo has announced that the US will not roll over waivers on its sanctions on Iranian oil exports when they expire in May. The question for investors is this: If Washington does make good on its threat, to what extent are other oil producers able and willing to increase output in order to make up any supply shortfall in global markets?
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Gavekal Research
Louis Gave
Apr 23rd 2019
The Case Of The Missing Inflation: Energy’s Impact
When the Fed launched QE2 in 2010, there was widespread fear that a great inflation beckoned. It has not exactly worked out that way. Louis considers the role energy played in a decade of becalmed US consumer prices. Yet, with oil prices again rising, he asks whether the market has grown complacent in its analysis of the relationship between oil and inflation.
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Gavekal Research
Tom Miller
Apr 18th 2019
Video: India's Hard-To-Call Election
India’s cacophonous exercise in democracy is well underway and polling suggests there is only a 50% chance of a Narendra Modi-led BJP holding onto power. Tom dives into the details of why the “bear-hugging” reformer has electoral problems this time around. Tom also considers the likely outcome of the election for Indian asset markets.
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